Question

Galehouse Gas Stations Inc. expects sales to increase from $1,510,000 to $1,710,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 30 percent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividends. a. What effect will this growth have on funds?

Answer 1

Answer:

Cash position reduces by -$24,760

Explanation:

If Gatehouse sales increases as expected the increase will be

1,710,000 - 1,510,000 = $200,000

Net assets is expected to represent 50% of sales, so this sales increase is expected to have Asset Buildup of:

0.50 * 200,000 = $100,000

Asset has a negative balance so it is -$100,000

Return on sales is 8% of the new sales value:

0.080 * 1,710,000 = $136,800 (profit)

45% of profit is paid out as dividend

0.45 * 136,800= -$61,560

It is negative as it represents cash going out

Total cash position = -100,000 + 136,800 - 61,560

Total cash position = -$24,760

Cash position reduces by -$24,760